Does Undervalued, Undeveloped Land Still Exist in the UK?

There absolutely are opportunities to increase asset value in UK land with development. But it takes at least four groups of leaders to make it happen.

The value of land has always been understood, going back centuries to when invaders and explorers sought new sources of agricultural products, minerals and places to live. It was a matter of economics that Christopher Columbus sailed for Spain, having convinced the King and Queen that their investment in his adventure would yield a great return.

Surprises in land value appreciation surface from time to time, of course. The Bedouins of the Saudi Arabian peninsula lived a nomadic subsistence for centuries until they discovered oil in the 20th century beneath the undulating sands of their desert kingdom. In a modern world, some land becomes more valuable when an industry (“Silicon Valley”) or a major point of transport is established in previously middle- or lower-value areas.

It’s hard to imagine that some land sites in the UK could be undervalued. The population is growing more so than in the Eurozone, the country being attractive to immigrants of every stripe. This tends to make one think that all land in the British Isles is simply going up in value at roughly the same pace. However, certain sectors – London and the South East in particular – are faring better than their neighbours in the post-Recession economy. Less fortunate are the counties to the north and west, where recovery as of 2013 was slower and less robust.

But in both these favoured and less-favoured areas of the UK there exists land that is hiding in plain sight, ready for investment and development. This is property that for one reason or another could accommodate residential development, but perhaps for the lack of people able and willing to make it happen. These people fall into four groups, and each of them is necessary to take undervalued, raw land and turn it into something much more productive and valuable:

1.    Business leaders – Residential development of market-rate housing rarely makes sense unless there is new or growing employment opportunity in the vicinity. With new jobs must come new people within relative proximity of the new workplaces.

2.    Land investment and planning use specialists – The time and capital required to take raw land and turn it into streets, utilities, homes and homebuyers is typically two to five years, when all goes well. So someone has to carry the considerable costs. While banks historically have done this, stringent lending standards are driving more developers to find private investors (who, it should be noted, are flocking to real estate because of disappointment with other types of investments). This is typically a “round one” of the development process, where the investors’ money is used to acquire sites, work with local planning authorities to get appropriate zoning approvals, develop sewers, other utilities and streets, before selling the land in “round two” for construction.

3.    Local planning authorities – Only towns where growth is desired will approve land use changes necessary to support development.  Thanks to the Localism Act and other efforts under the National Planning Policy Framework, the decision-making power has been decentralised to enable smarter planning in the hands of those most affected by it.

4.    Homebuilders – These are the “round two” leaders who complete the process. They identify the size, type and value of homes that are needed and are most likely to be sold successfully, after which they construct them.

Of course, each of these groups acts out of self-interest. But they must work in cooperation to a certain degree, and usually share the goal of financial success for the community as a whole.  Lately, there has been a surging interest between civic leaders, business leaders and property fund managers to create joint venture partnerships and pool their resources for mutual gain.

The place for individuals to participate in this leadership process includes the investment side. Anyone with £10,000 or more to invest can work with the land development specialists. But before doing so, such individuals are encouraged to seek advice from an independent financial planner, someone who can objectively review the alternative investment opportunity to see where it fits the investor’s risk portfolio.

Land Planning Tied to Multiple Local Economic Factors

Local planning authorities (LPAs) deal with more than just housing zone changes. New homes are one component of environmental, economic and life-quality considerations.
It’s a classic chicken-and-egg question. What comes first, a resident population of workers for companies looking to establish workplaces in a particular locale – or is it the other way around, when employers are the draw to workers who move to be near them?

It happens in both ways, of course. But central to both perspectives is the intrinsic relationship between populations and workplaces. Not only do employers need people with certain skill sets, but they also require a large-enough population from which to draw appropriate workers. But over time, people will relocate to areas where the jobs are most plentiful.

Government policy recognises this. The Housing Grants, Construction and Regeneration Act 1996 addressed the matter of regeneration and development as a means of economic stimulus in select regions. Among the legislation’s priorities are to provide or improve upon housing as well as social and recreational facilities “for the purpose of encouraging people to live or work in the area,” as described in the act.

Many other factors affect where both workplaces and homes are built, of course. And as the UK struggles to revive its economy while simultaneously addressing a housing shortage, all such factors form a constellation. These factors run the gamut from the general state of the economy (local and global), currency strength, government interventions and interest rates.

Note that housing – the construction phase of new homes in particular – is often discussed as a short-term economic stimulus. We tend to discuss the economic value of homes purely in the activity around construction and furnishing a home. Less is said about the broader economic benefits, such as providing residences for workers who are essential to local employers as well as their role as consumers of products and services in the area.

Local planning authorities (LPAs), newly empowered with the Localism Act, are at the core of land use designation decisions. Much is said about the environmental sustainability goals of LPAs, which are, of course, of great importance. Some expect that a focus on the preservation of greenbelt and agricultural lands might then be the ultimate priority, but in fact the National Planning Policy Framework as set forth in 2005 allows that local economics are part of sustainability as well. Preceding this, the Brundtland Commission said back in 1987, “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Planninghelp.org.uk, which champions planning for rural areas, translates this into at least three directives:

• The economics of planning – Ensure that “sufficient land of the right type, and in the right places, is available to allow businesses to set up and grow, and to be supported by infrastructure such as roads and railways.”

• The social role of planning – Housing, leisure, recreation, retail and schools make for strong, vibrant and healthy communities.

• The environment’s role – Protection and enhancement of landscapes and wildlife, as well as historic and archaeological structures, are essential to clean water, energy and mineral access, as well as providing cultural and tourism assets.?

So while new home construction is an important short-term stimulus to local economies, it really is part of a matrix of considerations and, well planned, part of the broad sustainability of a region as well.

As the UK struggles with a shortage of housing, each of these considerations should help guide a renewed building phase that should materialise in the coming months and years. Already, investors from the UK, the United States and elsewhere are financing projects that will add to the country’s housing inventory.

With such an obvious degree of pent-up demand, strategic land investors and homebuilders are identifying good opportunities. Individual investors investigating alternative investments must, of course, examine the risk profile of development in light of all these factors, as well as take counsel from an independent financial advisor on their overall portfolio allocation.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

Understanding Joint Venture Investments

There are many advantages to joint venture investments, including how the partners can bring experts together with a pool of investors.

Joint venture investments are vitally important to many types of enterprises: For new or revitalising companies, in technological research, and to businesses that work across national borders (where the joint venture partners bring financing and local expertise together). Joint ventures in real estate are a special category because of the nature of land development.

To the individual investor, a joint venture investment in land provides several advantages. A lone investor would bear all the risks – and rewards – of real estate development. But this can be too large an exposure for many individual land investors. The advantage of a joint venture investment in land is that individual investors can participate in larger acquisitions with better knowledge, expert management and economies of scale.

The nature of land investing raises many questions. Is it ripe for development? Are there barriers to development, such as local zoning or economic uncertainty? What are the opportunities that are not readily apparent to investors who are geographically removed from a particular parcel? In a joint real estate venture, appropriate expertise and analytical tools can help to answer these questions.

In a recovering economy, land located in favourable regions, counties and countries offers promise for capital growth through development as well as from market forces. Joint venture investors have already begun to seize the opportunity.

Joint Venture Land Opportunities in the UK

The joint venture land opportunity of today is to anticipate where post-recession growth will increase demand for housing and businesses.

Land investors – especially those interested in investing in strategic land – are currently focused on the UK, where a chronic shortage of housing means demand for land is high – and growing.

Global and local economic forces, in combination, are making joint venture land opportunity investing a particularly compelling scenario for investors.

Let us analyse how that works and its consequences. To the land investor, the depressed price of real estate caused by the worldwide economic downturn is a distinct factor – and opportunity. An economic recovery could well unleash demand for housing and commercial construction, which would consequently increase the price of land with relative speed. In some jurisdictions, the desire to attract residents and businesses creates a willingness to enact a change of use on key parcels of land.

Investors who are wary of the exposure from “going it alone” instead use joint ventures to purchase, manage and resell land. This enables the purchase of larger and perhaps more strategic tracts of property, often without borrowing money. A joint venture will also corral the talents of specialists in real estate acquisition, development and management who provide an important bridge between financiers and real property. That expertise can allow the partnership to focus on the most profitable part of the land development process: acquiring sites that have been identified to come forward for residential or mixed-use development but do not yet have detailed plans or permissions.

More investors see such JV arrangements as enabling them to achieve a balanced, diversified portfolio. Real estate has historically performed well and is in fact the source of wealth creation for a large proportion of individuals of high net worth. Current market conditions are thought to provide a rare opportunity for rapid valuation increase.

Real Asset Portfolio Investing

Investors who choose real asset portfolio investing appreciate diversification and reduced exposure.

The expertise that an investment advisor can offer means informed investment decisions and reduced risk as well as a range of ownership.

When an investor chooses to participate in a real asset portfolio, he or she is being strategic on at least two fronts. One is that real assets (commodities, precious metals, real estate, etc) are often used as hedges against inflation and market volatility that may be affecting financial instruments such as stocks and bonds. Second, by investing through a portfolio, the investor is avoiding exposure that might come from owning just one or two real assets.

Real estate is historically a smart place to achieve real asset growth – a large proportion of personal wealth has been historically achieved through both developed and undeveloped land. The “lone investor” alternative – owning just one piece of property – subjects that investor to the whims and happenstance of local jurisdictions and local economics. It does the owner of a large tract of land little good if the local jurisdiction is unfavourable to zoning changes or if a depressed regional business environment causes that land to drop in value.

This is where a well-managed real asset portfolio offers a strong advantage. The portfolio will have multiple properties in multiple locations. A portion will be readily realisable, returning value at paced durations. Any exposure to local challenges would be minimal, largely because fund managers are skilled at avoiding problematic assets in the first place. The level of expertise an experienced fund can bring to bear on a land acquisition also reduces the risk of poor investment decisions and low returns.

How the Localism Act Can Affect Land Values

Land Investment in the UK Can Be Affected By the Localism Act 2011

The decentralisation of decision-making relative to land use, as provided in the Localism Act 2011, might help or hinder land investors’ return on investment.

The Localism Act 2011 is, like any piece of sweeping legislation, both prized and pilloried, depending on whom you discuss it with. It is welcomed by many in its intent, which includes providing residents the power to initiate local referendums. This can apply to any local issue, and it includes the power to veto council tax increases (expected to be very popular over time).

With regard to land and housing, there are some key points of the Act that can affect owners, investors, developers and the eventual occupants of land and property. Essentially it decentralises decision-making for land use and infrastructure development, taking it away from the now-defunct Infrastructure Planning Commission. It also allows community residents, not a centralised commission, the following:

•    Levies. Local councils can impose a Community Infrastructure Levy on developers to pay for infrastructure improvements that will accommodate development.

•    Community voting. Allow neighbourhood plans that are approved by 50 percent or more of votes cast in a referendum.

•    Local decisions. Such neighbourhood-approved developments can be implemented without the requirement of planning consent.

For the land investor a natural question may simply be, “Is this a good thing?” The answer may lie in the skills of the investor (or the investor group and its professional land acquisition and development advisors) in working with communities. Are investors able to make a convincing case for development, for example, in a situation where land use zoning needs to be changed? While the intent of the Act is to expedite the development process, will that in fact happen in all cases?

To the matter of the Community Infrastructure Levy, this of course impacts the expense side of land investors’ balance sheets. It may well be affordable to pay for the development of roads, sewers, water supply and the like within a complex land site assembly plan. Or will a community activist, intent on blocking development, push for unnecessary and exorbitant community features that effectively stop development plans?

For the local communities, the questions also arise as to their capacity to effectively use the powers of the Localism Act. Do they have the capacity within community and voluntary organisations to produce smart neighbourhood plans? Will some factions wield asymmetrical power over others such that non-democratic outcomes result?

These and other questions may well find answers on a project-by-project, community-by-community basis. In some scenarios it might increase the overall return on investment for the land investor. Elsewhere, it may decrease it. The difference might lie in the skills of the investors themselves, able to anticipate both opportunities and problems created by the Act.

For the individual who contemplates becoming a strategic land investor, understanding the significant opportunity to invest in land that draws from the economics and housing needs of a growing population, these are important questions. Such individuals are advised to work with their qualified financial advisor to sort through the risks and rewards present in the current economic environment.